Skilled-unskilled wage differentials, unemployment and hours of work: the case of America and Europe

Abstract

In our analysis we follow Davis (1998a) and consider the consequences from trade between a flexible-wage America and a rigid-minimum-wage Europe. The minimum wage implies a certain level of unemployment in Europe, whereas factor price equalisation guarantees the same wage in America, albeit at full employment levels. We then use a process of endogenous human capital accumulation, together with a lower schooling productivity for the American unskilled workers to explain the larger skilled-unskilled wage differential in America. Moreover, we show that unskilled workers in America will work more hours than their European counterparts.